Applied Industrial (NYSE:AIT) Exceeds Q3 Expectations
Industrial products distributor Applied Industrial (NYSE:AIT) beat Wall Street’s revenue expectations in Q3 CY2024, but sales were flat year on year at $1.10 billion. Its GAAP profit of $2.36 per share was also 4.8% above analysts’ consensus estimates.
Is now the time to buy Applied Industrial? Find out by accessing our full research report, it’s free.
Applied Industrial (AIT) Q3 CY2024 Highlights:
- Revenue: $1.10 billion vs analyst estimates of $1.08 billion (1.5% beat)
- EPS: $2.36 vs analyst estimates of $2.25 (4.8% beat)
- EBITDA: $129 million vs analyst estimates of $130.1 million (small miss)
- EPS (GAAP) guidance for the full year is $9.63 at the midpoint, roughly in line with what analysts were expecting
- Gross Margin (GAAP): 29.6%, in line with the same quarter last year
- Operating Margin: 10.3%, in line with the same quarter last year
- EBITDA Margin: 11.7%, in line with the same quarter last year
- Free Cash Flow Margin: 11.1%, up from 5.6% in the same quarter last year
- Organic Revenue fell 3% year on year (1.8% in the same quarter last year)
- Market Capitalization: $8.60 billion
Neil A. Schrimsher, Applied’s President & Chief Executive Officer, commented, “I’m encouraged by the start to fiscal 2025. While the demand backdrop remains mixed, first-quarter sales exceeded our expectations and strengthened during September. Positive trends are developing across our Engineered Solutions segment including stronger orders within our Automation operations and the technology sector, while Service Center segment sales held steady as the quarter progressed. As expected, margin trends were more modest against difficult comparisons, mix dynamics, and softer volumes early in the quarter. We remain prudent with cost measures but balanced considering firming demand the past couple of months, while protecting investments in key strategic growth initiatives during the quarter. Additionally, free cash flow nearly doubled over the prior year to record first quarter levels. Our cash flow growth potential remains significant as we continue to scale our differentiated industry position, benefit from working capital initiatives, and enhance our margin profile.”
Company Overview
Formerly called The Ohio Ball Bearing Company, Applied Industrial (NYSE:AIT) distributes industrial products–everything from power tools to industrial valves–and services to a wide variety of industries.
Engineered Components and Systems
Engineered components and systems companies possess technical know-how in sometimes narrow areas such as metal forming or intelligent robotics. Lately, automation and connected equipment collecting analyzable data have been trending, creating new demand. On the other hand, like the broader industrials sector, engineered components and systems companies are at the whim of economic cycles. Consumer spending and interest rates, for example, can greatly impact the industrial production that drives demand for these companies’ offerings.
Sales Growth
A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Unfortunately, Applied Industrial’s 5.3% annualized revenue growth over the last five years was tepid. This shows it failed to expand in any major way and is a rough starting point for our analysis.
We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Applied Industrial’s annualized revenue growth of 6.1% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.
We can better understand the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don’t accurately reflect its fundamentals. Over the last two years, Applied Industrial’s organic revenue averaged 5.3% year-on-year growth. Because this number aligns with its normal revenue growth, we can see the company’s core operations (not M&A) drove most of its performance. 
This quarter, Applied Industrial’s $1.10 billion of revenue was flat year on year but beat Wall Street’s estimates by 1.5%.
Looking ahead, sell-side analysts expect revenue to grow 2% over the next 12 months, a deceleration versus the last two years. This projection is underwhelming and indicates the market believes its products and services will face some demand challenges.
When a company has more cash than it knows what to do with, buying back its own shares can make a lot of sense–as long as the price is right. Luckily, we’ve found one, a low-priced stock that is gushing free cash flow AND buying back shares. Click here to claim your Special Free Report on a fallen angel growth story that is already recovering from a setback.
Operating Margin
Applied Industrial has done a decent job managing its cost base over the last five years. The company has produced an average operating margin of 9.6%, higher than the broader industrials sector.
Analyzing the trend in its profitability, Applied Industrial’s annual operating margin rose by 4 percentage points over the last five years, showing its efficiency has improved.
In Q3, Applied Industrial generated an operating profit margin of 10.3%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.
Earnings Per Share
Analyzing long-term revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.
Applied Industrial’s EPS grew at an astounding 23.4% compounded annual growth rate over the last five years, higher than its 5.3% annualized revenue growth. This tells us the company became more profitable as it expanded.
We can take a deeper look into Applied Industrial’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, Applied Industrial’s operating margin was flat this quarter but expanded by 4 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its higher earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.
Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Applied Industrial, its two-year annual EPS growth of 16.7% was lower than its five-year trend. We still think its growth was good and hope it can accelerate in the future.
In Q3, Applied Industrial reported EPS at $2.36, down from $2.39 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 4.8%. Over the next 12 months, Wall Street expects Applied Industrial’s full-year EPS of $9.80 to stay about the same.
Key Takeaways from Applied Industrial’s Q3 Results
It was good to see Applied Industrial beat analysts’ revenue expectations this quarter. We were also glad its EPS outperformed Wall Street’s estimates. Zooming out, we think this was a decent quarter. The stock traded up 3.7% to $232.01 immediately after reporting.
So should you invest in Applied Industrial right now?When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.
